The significant increase in land value that comes from converting open lands to housing is hugely attractive. But newer investors need to know the rules.
Real estate investing in the UK is a landscape of great contrasts. While millions wait to find affordable housing – more often today renting, less often buying – there are investors ready to put money into building new homes to accommodate ready tenants and earn a fair profit in the process. In additional to real estate companies and individual investor-landlords, more recently institutional investors are getting into the game.
The prospect of turning open land into housing is of course very attractive. This can mean raising the value of agricultural land priced at £4,000 to £10,000 per acre to £200,000 or more per acre when local planning authorities grant permission to a use designation.
But if it is so attractive, why isn’t everyone doing it? Simply this: because such planning permissions are very hard to come by. Also, there are many factors that distinguish land with development potential from that which has none or very little.
But strategic land development nonetheless can yield great returns on investment. There are pitfalls to avoid and opportunities to seek out. Here are seven rules to follow that can help the UK land investment funds investor find worthwhile asset growth:
1. Determine if you are working alone or with partners – Some of the world’s wealthiest people achieved that status via real estate. But most of them had teams of advisors and their own professional skills to inform them where opportunities were good and not so good. Partners not only help spread the risk but can also provide important expertise.
2. Determine if you need the help of land development specialists – An investor group might work with land development professionals who study the markets on an on-going basis. These specialists often initiate the gathering of investors and earn their fees in part due to their knowledge of planning authority predispositions.
3. Be realistic about housing demand in that location – The least expensive land is located away from the most densely populated cities because demand there has been light. But if a new employer wants to establish a large workplace in a smaller town, there may be a strong opportunity to build in that location. Anticipating any such local economic factors is a skill of the most successful real estate investors.
4. Identify if the land has planning permission potential – While this might appear to be a simple matter of applying for a use change, it simply isn’t. Land use reforms, decentralizing authority to local planners, has helped. But those people who are professionally engaged in land use changes are more likely to find success in this area.
5. Self-build or sell to a homebuilder? – This is the question that largely depends on individual skill sets. Many investors own the land up until the point where houses can be built, but then sell them to homebuilding companies. Why? Builders know how to construct with efficiency, as well as how to identify what the market wants. At the same time, undertaking all tasks from raw land to selling to the first resident allows for maximization of profits.
6. Avoid dodgy land banking schemes – There are investment schemes that prey on investors who are new to this asset category. Typically, land that is highly unlikely to ever be sold for development or achieve planning permission is offered at an attractive price. The scheme representatives will overstate the chance to resell at a profit – proving the axiom once again, that if an offer sounds too good to be true it probably is. Qualified strategic land investing programmes will include a full prospectus that clearly outlines the marketability of properties.
7. Check the Land Registry – If a land development scheme still seems attractive to you, at least know the register of title – that is, the ownership rights – are in order.
Investors in land likely will make handsome profits over the next two decades due to the increasingly critical housing shortage. But buyer beware: not only should each investment be investigated thoroughly before proceeding, but one should also determine where and if capital growth properties fit into the whole of an investment portfolio matters. Consult an independent financial advisor to get his or her objective assessment.